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The government has decided to reduce its stake in the public sector banks, enabling the lenders to raise equity from the public though it will continue to hold majority stake, Finance Minister Arun Jaitley said on Thursday while presenting the Union Budget for 2014-15.

The move is a significant departure from the earlier government’s stance, which emphasised having at least 58 per cent government holding in public sector banks.

“While preserving the public ownership, the capital of these banks will be raised by increasing the shareholding of the people in a phased manner through the sale of shares largely through retail to common citizens of this country,” the finance minister said while adding that state-run banks will need to raise Rs 2.4 lakh crore equity by 2018 to conform with the Basel-III norms.

“Thus, while the government will continue to have majority shareholding, the citizens of India will also get direct shareholding in these banks, which currently they hold indirectly,” Jaitley added. Present law stipulates minimum 51 per cent government holding in public sector banks. In some of the banks, government’s share is as high as 80 per cent. The finance minister was, however, silent on how much capital the government will infuse in public sector banks. The previous United Progressive Alliance government, during the interim Budget, allocated about Rs 11,200 crore for capital infusion in public sector banks.

Market participants were disappointed that the government has not made any additional allocation for capital infusion.

“The Budget has been absolutely silent on the bank recapitalisation front, which is slightly negative for the banks.

A higher number was expected after the Rs 11,200 crore that was pumped in during the interim Budget but instead the banks have been asked to raise capital on their own. So it doesn’t give them any relief,” said Rajiv Mehta, analyst with IIFL.

Public sector banks have not received favourable response from the capital markets in recent times. Earlier this year, in January, State Bank of India (SBI), the country’s largest lender, came with a qualified institutional placement issue to which the response was rather a tepid one. Following SBI’s experience, several public sector lenders, including IDBI Bank, Syndicate Bank, Dena Bank deferred their QIP plans. Some of the bankers and industry experts, however, said with capital market conditions improving, there will be investors’ appetite for bank stocks.

“The Budget’s proposal to tap retail investors to shore up the banks’ capital is realistic in the context of the sustained revival in the stock and capital markets,” M Narendra, chairman and managing director, Indian Overseas Bank.

“It seems the government is in favour of follow-on public offer (FPO) of shares of state-run banks. This is timely because banks need to go back to the market to raise capital. If banks have to go to the market to raise money rather than wait for government allocations, they will get their act together,” said Shinjini Kumar, leader banking and capital markets, PwC India.

The finance minister’s statement comes at a time when a Reserve Bank of India (RBI) appointed committee on governance of banks’ boards — headed by former Axis Bank chairman PJ Nayak — advocated reducing government ownership in state-run banks below 51 per cent.

However, the minister agreed that greater autonomy should be given to banks’ boards, as recommended by the PJ Nayak committee. “We will also examine the proposal to give greater autonomy to the banks while making them accountable,” Jaitley informed the law makers of the country.

“The proposal to give additional autonomy to bank and make them more responsible is welcome and it remains to be seen whether the higher autonomy will focus on capital raising or credit management or NPA management,” Narendra said.

The finance minister also touched upon the issue of consolidation in public sector banks, which has been talked before also by different governments but the issue never took off the ground, mainly due to opposition from left parties.

“We have seen finance ministers talking about consolidation of public sector banks earlier as well. But nothing has happened so far. I don’t think if it is left to the banks, consolidation will happen in the public sector space. The current structure of public sector banks is such that voluntary consolidations look unlikely,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP and an advisor at E&Y India.

The previous government, while supported consolidation among public sector banks, but had clarified that banks’ board should take the initiative and the government will refrain from nudging them. The finance minister also expressed concern over the rising stressed assets in the banking system and announced six debt recovery tribunals (DRTs) to expedite recovery process while adding that the government will work out measures to revive stressed assets.

“The rising Non Performing Assets of Public Sector Banks is a matter of concern for the government. Six new DRTs would be set up at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri and Hyderabad,” Jaitley said.

“Setting up of six more DRTs is expected to help banks in recovering dues particularly when asset quality is the number one priority of banks,” said Arundhati Bhattacharya, chairman, State Bank of India.